Declining spreads have rendered the business unviable for small companies
as big boys take over

Mafatlal Finance has tied up with a leading multinational bank to
regain market share in the auto finance business

Lloyds Finance has stopped direct lending in auto finance, but has
instead tied up with Countrywide Finance for car loans

Hyundai Motor has entered into an alliance with Bank of America for
financing its car models in India

On the eve of the launch of small cars by bigwigs like Telco, Daewoo and
Hyundai, the auto finance business in India is bustling with activity.
Alliances of financiers with car manufacturers and strategic tie-ups among
financiers themselves have changed the profile of the auto finance business
in India, in the last few months.

Dominated by non-banking finance companies (NBFCs) till recently, the
business has undergone a significant change, with a handful of big players
taking over from a large number of small ones, during the last one year or
so, thanks to Reserve Bank of India(RBI)'s measures to regulate NBFCs. When
RBI directed NFBCs to curtail deposits to the new prescribed levels,
smaller NBFCs were forced to get out of the business.

As a result, the number of NBFCs in the auto finance business has shrunk
drastically. 'Last year, there were 400 NBFCs and a couple of foreign
banks. Today, there are 2-3 NBFCs and four foreign banks,' says Deepak
Gupta, chief executive officer, Kotak Mahindra Primus, a joint venture
between Kotak Mahindra Finance and Ford Credit International.

The sluggish economy, with stagnation in demand, too, has affected the
existing players. With as much as 50% of car sales estimated to take place
every year through financing schemes, the sluggish demand for automobiles
has affected financiers also.

Moreover, according to financiers, with the general economic slowdown, loan
recovery is a growing problem for them. 'Cheque-bouncing is about 15%,
which results in outstandings of 6-7% every month,' says Gupta. Adds N R
Divate, wholetime director, Mafatlal Finance, 'Financing of both commercial
vehicles and cars is getting tougher. Today, demand, and also the spreads,
are low.' From a high of 8%, the spreads are estimated to have come down to
about 6%, and for a few NBFCs, it is said to have reached a low of 1%.

With business getting tougher, NBFCs, which earlier were quite aggressive
in sanctioning car loans, have now become far more cautious in lending. One
of the leading players in auto finance, Lloyds Finance has, in fact,
stopped disbursing fresh loans. It has, instead, entered into an
arrangement with Countrywide Finance, wherein it will help the latter in
identifying business. As per the arrangement, the loan will be in
Countrywide's books.

But where NBFCs have lost out, the big players, especially a few foreign
banks, have taken over. Today, foreign banks like Citibank and Bank of
America are major players in the car finance market.

In fact, unlike NBFCs, banks have been able to maintain better spreads,
thanks to their aggressive deposit mobilisation strategy. 'With spreads
declining and costs of finance increasing, the way out is to reduce the
cost of funds. This can be done by two ways. One, by raising higher
deposits at lowers costs, and second, by pruning operating costs,' says
Ajay Mathur, regional sales manager, Bank of America. The bank has a
central loan processing unit which, according to him, reduces operating
costs.

With a substantial reduction in the number of players, many feel that phase
I of the shake-out is over. But among the existing big players, the
competition now is more severe, and rate of interest has become the key
factor.

Car finance in India is largely through hire purchase schemes. The customer
has to give a security deposit or pay margin money or advance instalments.
Banks, on the other hand, offer term loans for car finance, and the
customer has to pay margin money. With cost of finance becoming a critical
factor, a customer prefers the financier who offers the lowest interest
rates. With competition hotting up among financiers, interest rates on car
loans have already come down to a low of 16%, from a high of 26% a year
ago.

With tougher competition, a polarisation is expected in the second phase,
with each player having a niche market. This may come about in various
ways - financiers tying up with car manufacturers, financiers concentrating
on a particular region and financiers catering to a particular segment of
the market, say, small cars. Already, while Kotak has a hold on the retail
segment of the market, Mafatlal, according to Divate, has strong links in
the corporate car finance segment. As far as manufacturers' alliances are
concerned, Hyundai has a tie-up with Bank of America, while both
Countrywide and Citibank have an alliance with Maruti Udyog.

The launch of a slew of new models in the small car segment by a few
leading players in the automobile industry in the near future has excited
financiers. 'New models mean that there is an opportunity for the market to
grow. It is a very good thing happening for the business,' says Divate.
Adds Gupta, 'In the long run, the market would expand.' Mafatlal Finance,
for one, has identified the 800-1000 cc small car segment as its thrust
market for the future. Among the new cars expected to hit the Indian roads
in the small car segment in the coming months are Matiz from Daewoo, Santro
from Hyundai and a car code-named Mint from Telco.

As new small car models hit the roads, a big market for second-hand cars is
also expected to emerge, according to financiers. 'I visualise a well-
developed second-hand car market,' says Divate. So much so that this
segment could be a niche market for some. The increase in the supply of
second-hand cars, meanwhile, is expected to reduce their prices further.

Nonetheless, car financiers are optimistic about the future and expect the car finance market, estimated at Rs 3000 cr, to expand in the coming years.
Kotak Mahindra Primus has targeted hire-purchase disbursements of Rs 500 cr
for 9903. Having tied up with a leading foreign bank, Mafatlal Finance
hopes to disburse about Rs 60 cr in loans in 9903. 'I expect a reasonable
consumer boom post-1999-2000,' says Mathur. 'Today, the major buyers are
small businessmen and traders. The market will expand once new user
segments, like the salaried class, come into the picture,' says Gupta.

And, unlike in the past, not too many players will be fighting for a slice
of the auto finance cake, during the next boom.